Nigeria: Using Islamic Bonds to Forestall Debt Crisis

To sustain its economic growth, Nigeria has resorted financing its budget deficit and development needs through its domestic bond market.

The Debt Management Office recently published the total domestic debt of the 36 states and the Federal Capital Territory (FCT). It reached N1.471 trillion in 2012 compared with the N1.233 trillion in 2011. These figures do not include the N3.5 trillion from the Assets Management Company of Nigeria (AMCON) bonds.

Analysts have warned that the growing domestic debt may result in a debt crisis if not checked. Others have advised the government to look for cheaper financing alternatives.

One of the cheaper alternatives today is Sukuk or Islamic bonds, which are interest free. Sukuk are structured to pay a fixed profit rate rather than a coupon and are commonly backed or based on real estate or infrastructure.

Leading by example, Osun State has begun offering the country's first Islamic bond. The Osun State issuance of up to N10 billion ($62 million), seven-year sukuk denominated in local currency, will pay investors a fixed return of between 14.25 and 14.75 per cent. It’s the country’s first Islamic bond and it signalled the start of a trend.

Sovereign Sukuk issues from Africa hit a record high of nearly $140 billion last year, up 60 per cent from 2011.

The use of Islamic finance on the continent could grow further as several North and sub-Saharan African countries - including Morocco, Tunisia, South Africa and Kenya are laying the legal groundwork to issue sukuk.

The biggest challenge of Islamic Finance is producing an instrument that can be traded freely in the secondary market without breaching the fundamental Islamic principle of not trading in debt above or below par.